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POWER FAILURE: WHY VICTORIAN HOUSEHOLDS ARE NOT PLUGGING INTO ELECTRICITY COMPETITION

Andrea Sharam

The Victorian electricity industry has been revolutionised over the last decade as a result of two distinct but related policies: privatisation and market liberalisation or, a~ it is more. often referred to, National Competition Policy (NCP). While NCP does not require privatisation, many of its proponents, such as the various Commissions of Audit l established by governments over this period, have advocated it. The Kennett LiberallNational government (1992-99) pursued both policies, disaggregating and .fully privatising the former State Electricity Commission of (SECV) and taking the lead in introducing competition into the industry.

The purported benefits of competition were a key element of the Kennett government's reform program. Fin~nce Minister lan Smith said in a statement of government policy:

all Victorians will ultimately benefit from competition in the Victorian electricity industry, in particular from the empowerment that choice will give them in their dealings with their suppliers... it is expected that. .. retailers will offer innovative price/service mixes tailored la individual customer's 'needs (Office of the Regulator-General 1994, p. A.2.1.3).

For example, Department of Finance 1996 Norio/lol CO/llmi.\·.\·i,;1l t?fAlldit: Rt'port to Ihe COIIIIIIOllwt'o{r!l GOI'eTllIllt'Ilt, Australian Government Publishing Service, Canberra. POWER FAILURE 23

Treasurer Alan Stockdale also stated that:

Our second aim is to increase choice for both domestic and industrial consumers. Marketplace competition plus greater power in the hands of consumers will return benefits to both households and businesses as they gain greater freedom to choose products, prices and suppliers to suit their preferences. Maximum customer choice is designed to ensure that consumers obtain benefit for themselves rather than the benefits of greater efficiency flowing to those able to exploit monopoly rent (Stockdale 1994, p. 5).

The Bracks Labor government. which replaced the Kennett government in 1999, ultimately delivered competition to the household sector in 2002. Minister for Energy, Candy Broad (2000, p. 3), said the government 'supports the commercial drive in [the electricity] industry. We recognise the benefits that competition and choice can deliver for customers and the State's economy'. Remarkably, in developing policies to "introduce competition to the household sector, neither the Kennett nor Bracks governments assessed Victorians' attitudes to competition. Yet both had reason to believe that competition did not enjoy the level of public support that might have been expected2 The Office of the Regulator-Genera!'s (ORG) preparatory research for full retail competition (FRC) revealed that there was significant resistance to reform. Millward Brown (2001a), on behalf of the ORG, found in April 200I that 71 % of respondents to their survey had concerns about competition. This dropped to 55% in July 2001 and rose again in the period from 3 September to 25 November (rolling sample) to 73%. Asked what they were concerned about, respondents indicated costs, reliability, customer service, privatisation, lack of information and foreign ownership (Mill ward Brown 2001 b, 2oolc). A year later, consultants working for the Essential Services Commission's report on the effectiveness of FRC concluded, 'Victorians believe that

2 Irving Saulwick poll commissioned by Uniting Church in 's Commission for Mission in 1995 and the AGB McNair poll commissioned by the Agt' (4 Feb 1(95), and the 'Public Good' survey conducted in 2001 by thc Institute for Social Research, Swinbume University of Technology. 24 JOURNAL OF AUSTRALIAN POLITICAL ECONOMY No 52

competition is inevitable and they are not strongly for or against it, however they strongly support pUlling in place measures to ensure that every Victorian has access to essential services' (Wallis Consulting 2002, p. 33). This is to beg the question of why Victorians believe competition to be 'inevitable'. It is well known that privatisation of the electricity industry was and remains deeply unpopular and that competition, as Millward Brown found, eliCited troubling levels of concern. Could it be that . competition in electricity is a policy that consumers do not endorse? This possibility raises a further intriguing question: Could lack of support for competition affect households' willingness to participate in the market created by government policy? As the Essential Services Commission (ESC 2002, p. 58) put it, 'Ultimately, the most important indicator of the effectiveness of competition is the extent to which customers are entering into market contracts'. The ESC reported that, six months after the market had opened, only 5% of customers had switched. Their research found, however, that despite retailers recording certain customers as having switched, some of them did not believe or were unaware that they had done so (Wallis Consulting 2002, p. 58). Only 7% of households indieated they were 'very likely' to switch in the near future. On this basis, the ESC (2002, p. 77) had to conclude that 'the performance observed in the electricity retail market to date is not yet consistent with that of an effectively competitive market'. Nevertheless, they are optimistic that customer inertia is only temporary. Consumers' views of and initial experience with competition in electricity provision form the subject maller of this paper. More specifically, it aims to assess the extent to which Victorians see competition as a desirable policy goal, and to tease out the policy implications. The paper draws on the results of a stratified survey of Victorian households. The stratification involved dividing households into four groups: 'inner ' (within 10 km of the GPO); 'outer Melbourne' (between 10 km and the boundary of the Melbourne Statistical District); 'rural urban centres'; and settlements with less than' 1,000 persons, which includes people residing outside of towns ('rural'). The numbers sought for each category reflected the proportion of the total population of households living in these areas. The sample was POWER FAILURE 25 randomly selected using the White Pages telephone directory, and surveys were mailed to the respondents. Supplementary surveys were delivered by hand to specific low income localities using 2001 Census data, to increase the likelihood of obtaining an adequate number of low incnme households. The surveys were delivered during August, September and October 2002. Overall the response rate was about 10%. Respondents were asked to reply to the circumstances of the account holder.

Results3

Sample Characteristics

There were 576 responses to the survey. Compared with the 1996 Census data (ABS 2001), the sample was highly representative of the numbers of people born in Australia (71%) and overseas (24% in sample, 23% in Census). One respondent, or 0.17% of the sample, indicated they were of Aboriginal or Torres Strait heritage compared with 0.5 in the Census. Census data revealed that 75% of households speak only English at hnme. The survey sample nver-represented these households at 85%. In terms of median individual income (which was used rather than household income because retailers' market strategies will reflect what they know about the account holder), the sample under-represented (37%) those under the ABS 2001 median income of $300 to $399 per week (ABS 2001). The number of households in the sample who claimed government concession status for their electricity was 218 households (37.8%), which closely reflected. the 40% of Victorian households who claimed concessions in 2003 4 '

3 Where percentages in tables and text do not total 100, this may be due to rounding, exclusion of 'don't know' categories, multiple answers or 'not stated'.1'hroughout the paper, an asterisk denotes any value of less than zero. 4 Total number of households in receipt of electricity concession (740,330) according to 2003-04 Victorian government budget paper no. 3, compared with total number of households in Victoria (1,838,000) according to the ABS (Australia Now, Cat. no. 4102). 26 JOURNAL OF AUSTRALIAN POLITICAL ECONOMY No 52

Table 1: Household structure: Comparing Survey Sample with Census

% 1996 0=574 Census· Live alone 21 22.4 Live with partner 35 22.8 Sole parent family 7 9.5 Nuclear family 30 36.6 Share house 5 36 Other family 2 1.4 TOTAL lOO lOO ... ABS 1996 Census of Population and Housing 827 Dwelling structure by household type and family type

As Table I shows. compared with the 1996 Census, the sample slightly under-represented families, while over-representing couples without children. Sole paren1 families, sole person households and group and other family households were reasonably representative.

Table 2: Dislribution of Sample as Percenlage of Viclorian Population

Locality % share or sample % Victorian population

Inner Melbourne 16 25 Outer Melbourne 52 48 Rural urban centres 13 18 Rural (other) 18 10 Don't know • Total lOO 101

As shown in Table 2, the dispersal over geographical areas was reasonably consistent with the state population. The 'rural urban centres' and 'rural' categories have been combined for reporting because postcodes were used to identify the localities for the stratification but do not accurately reflect the division between the two. POWER FAILURE 27

Switching

Respondents were asked about competition, the benefits that might flow to Victorians as a result of it, and their own choices since the market opened. A key argument raised by proponents of market based reform is that it can be expected to lead to price falls, as consumers gain the power to choose the best deal available for them. After ten years of policy settings intended to foster support for c,?mpetition in electricity provision, and significant effort on the part of government and electricity retailers to promote the opening of the market to households, it would be expected that domestic customers would exhibit interest in choice. The tariff that domestic customers were on at the opening of competition is known as' the deemed tariff. This is intended to be a temporary tariff until customers take up a market contract. Customers who unable to obtain a market contract or choose not to enter the market (for example, when they move dwelling) are able until the end of December 2004 to get supply under safety net provisions. This tariff is called the sranding offer. Each former 'host' or local retailer is required to provide this to customers within its former franchise territory. The ESC (2002) found that around 5% of customers had switched, which in their opinion and that of the government was too little to permit a conclusion that the market was at present effective. This survey found that 13% of customers had switched, the sum of the four categories in Table 3, but this figure needs to be treated with caution. Firstly, the survey may over-represent switchers as they had more capacity to self­ select in responding to the questionnaire. Secondly, as will be discussed later in this paper, around half the switchers had moved residence and few of those who moved indicated they had actively exercised 'choice'. Discounting these customers, the number of switchers was around 7%, which confirms the cuslomerinertia found by the ESC. There are a number of possible explanations for customer inertia. Householders may be satisfied with their current supply arrangement and not interested in switching. It may be the case that, as the ESC believes, it will take time. additional information and education of consumers for the market to mature. Conversely, it may be the case that householders do not want choice. Customer inertia may also be a direct result of 28 JOURNAL OF AUSTRALIAN POLITICAL ECONOMY No 52 retailers' marketing strategies. The survey tested customers' attitudes and experience of the market in order to tease out the implications of cust9mer inertia.

Table 3: Number of Customers Moviug from'Deemed Contract

% Movement from the deemed contract to No. n-576 Market contract with new supplier 34 5.9 Market contract with existing supplier 25 4.3 Moved dwelling without knowing to what 19 3.3 To standing offer contract t • Total 79 13.5

Customer Attitudes

When asked whether they thought competition would mean that they would be better off due to price falls, surprisingly only 10% (n=572) of respondents answered positively (Table 4). The non-English speaking background (NESB) customers' expressed views similar to those expressed by customers as a whole. Rural customers were twice as likely as their Melbourne counterparts to believe prices would increase. Less than 2% of rural customers thought prices would decrease. .

Such arguments are central to the belief that competition can be expected to lead to improved levels of service. Businesses know that if service levels fall customers are likely to shift to another company. Again. somewhat surprisingly, respondents to our survey were sceptical about this. Only 20% felt that they would experience improved service, with a higher percentage among NESB customers (30%). 15% thought that customer service would worsen, with 48% thinking it would remain the same. Melbourne and rural. customers had about the same degree of pessimism concerning the possibility of customer service levels worsening, but there was a significant difference about whether it would improve, with outer Melbourne customers being four times more likely than either inner Melbourne or rural customers to believe that it would do POWER FAILURE 29 so (4% versus 12%). This difference can be explained at least in part by the higher support for the market amongst NESB customers and the absence ofNESB in rural areas.

Table 4: Customer Attitudes to the Price Benefits of the Electricity Market

Q: Do you think that for you competition in % . electricitv will lead VDU to p3vintf - 0=572 higher prices 29 same price 27 lower prices 10 don't know 24 total lOO

Retail competition has no impact on reliability of supply but there is a fairly wide held misconception that it does, with almost 44% indicating an impact (Table 5). Only 9% expected reliability would improve, while 19% thought it would deteriorate. As with price and customer service, NESB respondents held more favourable attitudes to the market, with 24% believing that reliability would improve (compared with only 9% of non-NESB respondents).

Table 5: Cuslomer Attitudes Towards Reliability of Supply in the Private Market

Q: In terms of reliability of supply, do you think that % COffiDetition will mean that most electricitv customers will be 0=574 better off 9 same.. 41 worse off 19 varied impact 16 don't know 15 total 100

5 Customers were given the option of slating that they thought they would pay higher prices for greenpower, to avoid confusion relating 10 a higher price for a different product. 30 JOURNAL OF AUSTRALIAN POLITICAL ECONOMY No 52

Attitudes varied only slightly by income. Respondents with individual incomes under $20,000 p.a. were four times more likely to think that competition would result in them paying higher rather than lower prices. Those with incomes over $20,000 p.a. were around three times more likely to believe they would pay higher rather than lower prices.

It might be expected that the 10% of respondents who felt positively about lower prices in the market would be highly represented amongst those who had taken the opportunity to switch to a market contract. Of the 59 households who thought they would be better off, only 16 actually switched. In relation to customer service, only 23 of the 117 who thought customer service would be better with competition exercised choice.

Awareness of the Market

. ;)~r':;.: ·"1,,,; '1.:, ~ ,•" When asked to name their own supplier in 2001, 21 % (n=532) admitted . " '.v ";) .) ~ J' -,' • to .notkno,:ving the answer without looking at their bill (Table 6). One r~sP9:nd~n("'n?-'med l:\ 'gas company and 56 used company names that are out of daii;."Asked to list names of retailers, 4.5% could not name any. Asked' if they thought other people knew who supplied them, given the changes to the industry, 41 % (n=564) felt that other people did not know the name of their own supplier

Table 6: Customers' Knowledge of Retailers

% Q: How many retailers can you name? (please name) 0=484 oretailers 4.5 I retailer 39.5 2 retailers 33.5 3 retailers 15 4 retailers 5 5 retailers 2 6 retailers • 7 retailers • 8 retailers • Total 100 ,.' i,l '.: POWER FAILURE 3\

As Table 7 indicaIes, most respondents (54%) failed to recall any retailer contacting Ihem;but 16% recall receiving more than one contact. Of the 750,000 offers which the ESC (2002) says retailers made, it is evident that there is considerable unevenness in the distribution across the total of 1.2 million small business and domestic customers. This may suggest, as the ESC indicates, that retailer activity is confined to specific market segments.

Table 7: Retailer'Activity in the Market

% Number of customer contacts initiated by retailers 0=552 Contacted by 0 retailer 54 Contacted by 1 retailer 29 Contacted by 2 retailers 14 Contacted by 3 retailers 2 Contacted by 4 retailers • Total 100

'Offers' need to be distinguished from the final agreement to contract. For example, an offer can be made on an unsolicited basis that does not preclude the retailer from later withdrawing it should a customer exhibit interest. From these contacts. 18.5% (n=524) of respondents believed they had been made one offer, 6% two offers, and less than 1% 3 offers. Most respondents had received letters (33%, n=385), with 9% (n=522) approached by telemarketers and 7% (n=534) by door-ta-door salespeople. Less than I% had encountered salespeople in shopping centres. There were no significant differences in the proportion of NESB and non-NESB households being contacted by retailers. A small number of the respondents (9%) actively sought out an offer, although not all of these were successful in obtaining a contract. While customer interest is low, low participation may also be explained by retailer preference for higher margin customers. 32 JOURNAL OF AUSTRALIAN POLITICAL ECONOMY No 52

Factors Influencing Choice

Respondents were given a list of factors that may have influenced them when considering a choice of supplier. They were not asked to rank these factors in relation to each other.

Table 8: Factors that are Important in Shopping Around

Comparison of influences % Very % % Not n= on shoppine6 Important Important Important Price 64 25 11 476 Greenpower 30 37 33 443 Combined bills 31 30 38 460 Energy efficiency help 20 25 55 434 HelD buying: aooliances t6 23 57 437

Perhaps predictably, those in full-time work and on higher incomes were more interested in 'greenpower' (renewable energy) deals. During this period, known greenpower offers were more .. expensive than deemed/standing offers. Social security beneficiaries were three .times more likely to say that greenpower was not important rather than very important. Nevertheless. there was still interest, with just under 20% (n=429) of respondents with incomes under $20,000 saying greenpower was very important or important. The perception at the time (based in reality) that greenpower was more expensive clearly deterred these customers from switching for this reason. There is currently no greenpower deemed/standing offer. Interest in energy efficiency is far less across all income groups, with the,exception of social security beneficiaries who rated it equally with greenpower. Combined bills (known as 'dual fuel' deals) have popularity, but these are commonly offered with a price discount, and the survey did not attempt to distinguish between the price incentive or other perceived benefits of combining bills. There was a considerable level of interest in linking the

6 These are the top five choices out of a set of nine. Support for Ihe remaining four options was low. POWER FAILURE 33

buying of appliances with purchase· of electricity. Some retailers current!y offer such services.·

. Why Customers Did Not Switch

Up until this point we have sought to understand why the switching rates in the fully competitive electricity market have been so low. Respondents to the survey indicated a strong interest in price savings but lacked faith in the market to deliver price reductions or better service. The survey also found that retailer activity would appear to be focused on some customer groups but not others. Table 9 shows that of those respondents who had considered changing but had not done so, 19% (n=278) were still thinking about the possibility. The majority (52%) of customers in this group of potential switchers had been deterred from entering the market by their experience to date, including 42% (n=40) of those respondents who held positive views about the benefits of competition. The perceived 'hassle' of changing deterred the most (18%), while insufficient information and inability to compare offers were also problems. 9% felt the incentives to switch were too small.

Table 9: Reasons for Considering Switching but not Doing So

% n=278 have not taken next step 19 unable to obtain sufficient information 12 unable to compare offers pro~erly 13 put off by hassle of changing 18 did not see anything worth changing for 9 no supplier made an offer 27 other 2 total 100

27% had not received an offer. These may be low value customers who, from a retailer's perspective, do not warrant the cost of their acquisition. 34 JOURNAL OF AUSTRALIAN POLITICAL ECONOMY No 52

Of those respondents who had not considered switching at all, 11 % answered that they were unaware of competition (Table 10). 15% were anticipating possible switching, but 68% were resistant, either actively or passively. Comments in the 'other' category are worth closer inspection: 'all the same', 'can't be bothered', 'can't see the point', 'expect minimal impact', 'lack of knowledge', 'no time to shop around' and 'privatisation protest' were s9me. None were positive towards competition.

A number of respondents volunteered unsolicited comments. There was only one theme: a belief in the collective public interest of public ownership. The following are two examples:

• Believe profit motive will result in me paying more and all companies will be out to screw me Qut of money, not give it to me. o At midnight on 24 March 1944 I was shot down in a Manchester . bomber after bombing Berlin. One objective was to keep the world free and own our country and its services. Now the idiot politicians have sold all our essential services putting us all at risk. We could now manage with half the bastards.

Table 10: Reasons for not Considering Switching

% 0=241 did not know I could 11 satisfied with current arrangement 55 qave not got around to it 11 waiting to join community buying group • waiting for gas competition I waiting for market to development 3 put off needing to learn so much 4 afraid to change 2 see not changing as a kind of protest against privatisation 7 other 5 Total 100

These less than positive views about the market, combined with those who are satisfied with the pre-competition status quo, means that about POWER FAILURE 35 half of the respondents are not looking to enter the market at this point or look likely to. There was nothing to distinguish one income group (or source) from another among these respondents.

Discussion

The Economic Planning Advisory Committee (1989) and the Industry Commission (1991) promoted electricity competition well over a decade ago. There is however, little literature relating to the impact or possible impacts of market liberalisation of electricity on the household sector (Ernst 1997). The literature that relates to electricity industry market reform almost invariably considers generation. networks and competition for large customers without regard to domesti'c users. The Hilmer Report' (Hilmer 1993) rapidly became the basis of NCP. Subsequent reforms to a range of sectors, including electricity, were largely based on later Industry Commission (1995) modelling of the Australian economy that anticipated $23 billion worth of savings should competition be implemented. However, NCP has been criticised for being implemented on the basis of theory rather than 'economic analysis' (Quiggin 1999, p. 74). After ten years of policy settings intended to foster support for competition in electricity provision, and IOl)ger for markets more generally, it could be expected that there would be more popular support for the policy, but this is doubtful in relation io essential services. The explanation may lay in part to the lack of substantiation of the claims of benefits flowing to households and the championing of the removal of various subsidies that would leave many households losers rather than winners. Indeed after a decade of reform residential customers in Victoria are on average paying 3% more for their electricity, and some customers 24% more (Sharam 2003). Relatively few had had benefits. In addition, two of the incumb~nt retailers merged within months of the market opening to households, taking the number of major players down to three. Mergers. withdrawal of service, market segmentation, and increasi~g charges for small low volume customers have been features of deregulated banking and telecommunications.. It is not difficult to see why popular opinion is out of step with elite opinion. · 36 JOURNAL OF AUSTRALIAN POLITICAL ECONOMY No 52

Graeme Samuel (2003), the then National Competition Council chairman and now chair of the Australian Competition and Consumer Commission, captures the continuing lack of support for competition policy: 'In a society predicated on the notion of a "fair go", we should also not be too surPrised when we see a questioning of policies that may appear to sacrifice fairness for economic growth.' He articulates a collective resistance to elite policy, noting that people are resistant to economic reform because of its perceived impact upon community and because 'corporations (are] perceived to be delinquent citizens'. The introduction of competition into the electricity sector to the household level is highly reliant on customer endorsement and participation. The levels of antipathy exhibited by respondents to this survey have antecedents that should make the finding of customer inertia unsurprising. The 1990s witnessed both a Senate inquiry and a House of Representatives inquiry in response to community concerns about NCP. In addition, customer inertia has been evident in other jurisdictions and analogous industries. The decision to· implement FRC when customer endorsement was uncertain was therefore a considerable risk, and arguably a poor basis for policy making. Domestic customer inertia in the electricity sector may well be enduring. This raises important policy implications. some of which were foreseen. SRC International (1998) warned the Independent Pricing and Regulatory Tribunal that Australian domestic customers were unlikely to be motivated to switch for amounts that would sustain the profits of retailers. It envisaged that customer inertia would result in retailers raising prices to monopoly levels. In order to protect customers from such monopoly prices, SRC International argued the response of governments would be to impose price controls. In Victoria, as in the United Kingdom, the market opened with price controls (price caps) already in place. These are a maximum price sanctioned by the regulator or government. Price caps in Victoria were imposed because the incumbent retailers proposed substantial price increases on the eve of the opening of the market. The retailers argue that the tariff that domestic customers are on at the beginning of competition (the deemed tariff) and the safety net (standing offers) need to be higher than the prices offered in the market; competition is stimulated by new POWER FAILURE 37

. entrant retailers perceiving an opportunity to take profits by undercutting incumbents, and hence competing the price down. This gap between the opening price and the lower market price (the competition incentive) is known as 'headroom'. The Victorian government agreed that prices needed to be above market prices at the outset of competition. This concept of headroom looks just a little like the department store putting its prices up before holding a sale. The difficulty for government is the possibility of continuing and widespread inertia. This would denote market failure and by default leave customers exposed to price limited only by price caps, that is, government sanctioned monopoly prices. There is already evidence in the United Kingdom that customer inertia has resulted in extensive monopoly pricing, raising doubts as to whether the domestic market could ever be considered functionally competitive (Brigham and Waterson 2003, p. 12). In addition to what may be sustained customer inertia, the single largest group who are actively participating in the market are low income (therefore likely to be low volume) and hence low margin customers. This suggests that such households are very price sensitive and responsive. Retailers may well instigate changes to their marketing and customer acquisition programs to minimise the migration of this customer segment. As the ESC (2002) noted, retailers appear at the outset to be avoiding low volume customers. If this is the case, it would result in a declining number of customers switching unless it was offset by increases in other customer segments, but there is no evidence to suggest that higher margin customers (other than the small group seeking greenpower deals) are likely to change their attitude to competition. As this survey also identified, around half of the switchers entered the market as a result of moving dwelling. These customers have higher transaction costs and as a consequence lower the margin available for the retailer. This is especially true of renters, who move on average once every five years, compared to home owners' average of every seven years. Rental housing is also the growth segment of the housing market increasingly servicing low income households (BUlke and Ralston 2003). . 38 JOURNAL OF AUSTRALIAN POLITICAL ECONOMY No 52

It is already evident that retailers are attracted to acquisition methods that reach wealthier customers while effectively screening out many low income customers. Loyalty programs .are a prime example. Whilst exclusion from the market is disturbing, the alternative is the possibility th'at price-conscious low income households may be subject to exploitation by retailers. For example, offers of large cash rebates are attractive to those on low fixed incomes. One Victorian retailer provides such inducements, but these offers also involve tariff structures that can be highly disadvantageous to small volume users. The upfront rebate benefit may be more than offset by a higher cost of consumption. Finally, the legislation providing the current 'obligation to offer' (the safety net tarift) sunsets at the end of December, 2003. This comprises the final act of reform in which supply becomes a matter of choice on the part of retailers. Migration onto market contracts at this point will be involuntary, raising issues for that section of the community - dominated by senior citizens - that has failed to note the existence of the market. More importantly it opens the .way for unhindered market segmentation aimed at exclusion of problem payers, or the imposition of exorbitant charges in cases where the customer has no market power. Arguably, given the essential service nature of electricity all households, are price takers. Therefore vulnerable and disadvantaged customers are very much at risk of market abuse. Ironically the existence of customer inertia . and the 'protection' of the deemed/standing offer currently stymies the dis:"'aggregation of customers into 'bordered' markets.

Conclusion

This research sought to understand the attitudes and initial experience of households in the recently opened fully competitive electricity market in Victoria. The survey discovered a substantial gap between the views of elite policy makers and the aspirations of ordinary Victorians. This gap can help explain customer inertia in the market. The survey also found that current participation rates are largely the result of households !! 'J. '. POWER FAtLURE 39

moving dwelling and/or the experience of fuel poverty.? The small .' , margins and high transaction costsmay result in retailers attempting to recoup a greater proportion o(costs from these customers, or minimise . thei~ migration to market contracts. . There are important policy lessons here for government. It cannot be assumed that competition will emerge simply because a competitive framework has been put in place. Not only is there the risk that customer inertia will resuII in customers paying higher prices than if there had been no market, but the costs of implementing and running the market, estirnated at between $1.5 and $4 billion nationally over the first five years,8 must be recovered from households regardless of the success or failure of the market. Customers may legitimately ask about the adequacy of the analysis that was used to support the Victorian government's decision to' proceed with FRC. The issue now is what levels of customer inertia will the government tolerate and for how long. Persistent customer inertia means that, as more time passes, the loss to the community and to the economy more generally mounts. Despite this customer inertia and the access to service that the deemed./standing offer tariffs provide may be acting to inhibit market segmentation intended to exclude and/or exploit vulnerable and disadvantaged households caught in an emerging residual market.

References ABS (2001) Census data on Population and Housing and Census Basic Community Profile and Snapshot Brigham. B, and Waterson, M. (2003) Strategic Change in the Market for Domestic Electricity in the UK, Warwick Business School, University of Warwick, Coventry, .

7 Fuel poverty' refers to people's inability to meet their basic needs for energy and arises as a result of an intersection between inadequate income, poor thermal efficiency of housing, inefflcie'nt appliances, needs (life cycle stage) and tariff structures. 8 Energy Action Group 2002 SubmiJsioll to COAG Ellergy Market,l' Re\'iew, . 40 JOURNAL OF AUSTRALIAN POLITICAL ECONOMY No 52

Broad, C. (2000) Electricity policy under the Victorian Labor government, opening address to 'The Power of Victoria' conference, Electricity Supply Association of Australia, Melbourne, 2 May. Burke, T. and Ralslon. L. (2003) Analysis of Expenditure Patterns and Levels of Household Indebtedness of Public and Private Rental Households. 1975 to 1999, Final Report, Australian Housing and Urban Research Institute. Melbourne, .

Economic Planning ~dvisory Council (1989) Promoting Competition in Australia, Council Paper no. 38. Canberra. ESC (2002) Special Investigation: Review of the Effectiveness of Full Retail Competition for Electricity, Final Report, Essential Services Conunission. Melbourne. Emst, J. (1997) Public Utility Privatisation and Competition: Challenges to Equity and the "Environment,Just Policy, No.9, March. Hilmer, F. (1993) National Competition Policy: Report by the Independent Committee of Inquiry, Australian Government Publishing Service, Canberra. Industry Commission (1991) Energy Generation and Distribution, vols 1 and 2, Australian Government Publishing Service, Canberra. Industry Commission (1995) The Growth and Revenue Implications of Hilmer and Related Reforms, Australian Government Publishing Service, Canberra. MilIWard Brown (200la) Electricity Contestability Quantitative Research: Mass Market Customers, pr~pared for Office of the Regulator-General,-Melbourne. Millward Brown (2001 b) Mass Market Electricity Competition Tracking Research: Benchmark Findings, prepared for Office of the Regulator-General, Melbourne. Millward Brown (2001c) Mass Market Electricity Competition Tracking Research: Rounds 1-3 Findings, prepared for Office of the Regulator-General, Melbourne. Office of the· Regulator-General (1994) Electricity Industry Regulatory Statement, Melbourne. Quiggin, J. (1999) quoted in the Senate Select Committee on the Socio-Economic Consequences of the National Competition Policy, Competition Policy: Friend or Foe ­ Economic Surplus, Social Deficit?, Interim Report, Canberra. Samuel, G. (2003) 'Memo, business: You must offer the community a fairer go', Age, 28 Feb. Sharam, A. (2003) Second Class customers: Pre-Payment Meters, the Fuel Poor and Discrimination, Energy Action Group, North Melbourne SRC International (1998) Contestability for Residential and Other Low Use Electricity Customers, prepared for Independent Pricing and Regulatory Tribunal, Sydney. POWER FAILURE 41

Slockdale, A. (1994) Power industry reform; What it means for the Victorian economy. address to National Power Industry conference. Regent Hotel. Melbourne, 21 July. Wallis Consulting (2002) The Essential Services Commission Assessing the Effectiveness of Full Retail Competition in the Victorian Electricity Market, prepared for Essential Services Commission, Melbourne.

LABOUR & INDUSTRY

A joumill of the sodilt and economic relations of work Exeeullve Edtton, • Ray Jurwldlnl ~ln CampbeU Santina Btlrtone Bruce Wllson Sara CharlesWorIh

Vol. 14, No. 1, August 2003

Peak Council Organising at Work: ACTU Strategy 1994-2000 Rue Cooper

Immigrants and Hotels: Segmentation Theory Revisited Carolille Alcorso

Regulating Outsourclng: The Use o( Contractors on the Central Queensland CoalfieJds, 1974-2003 Bradfe.v Bowdell

Group Trainina: Companies and tbe Inter·nnn Provision of Training In Australia Richard Coolle.'~

From Essex to Cyberspace: Virtual Organisation Reality and Real Organisational Vlrtuallly Patrick Dawson. DQI'id Preece alld /cUI McLollglllil/

Managing flexible Working Time Arrangements: Negotiations between Mothers and Managers In a Canberra Hospital Afisoll Morellead

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